Innovative Strategies for Real Estate Investors Managing Vacant Property Sales
Selling raw land or undeveloped property can lead to a significant tax liability—especially if the land value has appreciated over time. For investment property owners, understanding how capital gains apply to land sales is key to preserving after-tax profits and making informed decisions.
While there’s no “one-size-fits-all” way to eliminate tax liability entirely, several IRS-recognized approaches can help reduce, defer, or strategically manage capital gains exposure.
How Capital Gains on Land Are Calculated
You may owe capital gains tax on the difference when you sell land for more than your adjusted basis, including your original purchase price plus improvements and certain acquisition costs.
If the land was held for over a year, gains are considered long-term and taxed at federal rates (typically 15% or 20%, depending on your income level). Short-term gains on land held less than a year are taxed at ordinary income tax rates.
Unlike improved real estate, land is not depreciated for tax purposes, so sales do not trigger depreciation recapture, but this also means fewer built-in deductions.
1. Use a 1031 Exchange to Defer Taxes
One commonly used and IRS-recognized strategy for deferring capital gains taxes on land sales is the 1031 Exchange. This IRS provision allows you to sell real property (including land) and reinvest the proceeds into another qualifying like-kind property—deferring capital gains tax in the process.
To qualify:
- The land must have been held for investment or business use.
- You must identify a replacement property within 45 days of the sale.
- You must complete the purchase of the replacement within 180 days.
1031 Exchanges can also transition from actively managed land into passive vehicles like Delaware Statutory Trusts (DSTs), offering a way to maintain real estate exposure while reducing day-to-day involvement.
2. Convert the Land to a Primary Residence (In Limited Cases)
If you’ve built a residence on the land and used it as your primary home for at least two of the past five years, you may be eligible for the Section 121 exclusion—which allows homeowners to exclude up to $250,000 in capital gains from taxation (or up to $500,000 for married couples filing jointly), subject to specific ownership and use tests.
Note: This only applies to gains from the portion of the land associated with the residence. Raw or separate parcels of land generally don’t qualify on their own.
3. Donate or Gift the Property
Donating appreciated land to a qualified charitable organization may eliminate capital gains tax exposure and generate a charitable deduction based on the property's fair market value, subject to IRS limits on charitable contributions.
Alternatively, gifting the property to heirs during your lifetime may reduce the size of your taxable estate. If the land is transferred through inheritance, the recipient generally receives a stepped-up basis equal to the property's fair market value at the date of death. This can significantly reduce or eliminate capital gains taxes if the heir later sells the property.
As with all estate and charitable planning strategies, it is advisable to consult a qualified tax advisor or estate attorney to evaluate potential tax outcomes and ensure compliance with current IRS regulations.
Final Thoughts
Selling land can trigger significant capital gains taxes, but thoughtful planning may help reduce or defer the impact. Whether you pursue a 1031 exchange, convert the property to a primary residence, or consider charitable or estate-based strategies, the most appropriate approach will depend on your financial objectives, timeline, and how the land has been used.
It is strongly recommended that you consult a qualified tax advisor or real estate strategist before selling. With careful planning and the right professional guidance, it may be possible to preserve more of your land's value and manage tax exposure effectively.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
Article written by: Story Amplify. Story Amplify is a marketing agency that offers services such as copywriting across industries, including financial services, real estate investment services, and miscellaneous small businesses.
Sources
https://www.irs.gov/taxtopics/tc409#Rates
https://www.irs.gov/publications/p523
https://www.irs.gov/businesses/small-businesses-self-employed/estate-and-gift-taxes
